(Kitco News) – In the never-ending search for yield, decentralized finance (DeFi) has emerged as a cornucopia of options for cryptocurrency holders to put their tokens to work, with the options running the gambit from relatively safe to high risk.
One of the simplest forms of yield offered by blockchain networks is the ability to stake tokens in exchange for rewards – known as Proof-of-Stake (PoS) – and is considered to be among the safest of options available to crypto traders, though it comes at the expense of having tokens locked on the network and unavailable for use in other sectors of the ecosystem.
For that reason, liquid staking has become a popular option, as it offers the ability to earn through staking while simultaneously accessing the value held in the staked tokens via a secondary deposit token that can be put to work in other yield opportunities.
“Native staking requires you to lock your tokens directly within a blockchain network, to enhance its security and functionality while earning rewards in the process,” said Michael Repetny, Core Contributor at Marinade, the leading liquid staking protocol on Solana, during a conversation with Kitco Crypto.
“In contrast, liquid staking lets you stake your tokens and earn rewards without locking up your assets, providing you with a deposit token representing your staked assets which can then be used in other DeFi activities,” he added. “Recently launched Marinade v2, for instance, revolutionizes staking by combining native and liquid staking principles, maximizing user benefits and security.”
According to Repetny, the primary benefit of liquid staking is that it “offers increased flexibility by keeping staked assets available for other investments.”
“This approach maximizes capital efficiency, enabling you to earn staking rewards while using the deposit tokens in DeFi applications, thereby enhancing overall returns and providing liquidity to your staked assets,” he said.
For example, the Solana (SOL) deposit token offered on Marinade, mSOL, “provides additional security and yield optimization, ensuring that stakers receive the best possible returns with minimal risk,” Repenty said.
On the risk side of the equation, the main risks of liquid staking “include potential vulnerabilities in smart contracts and the possibility of deposit tokens deviating from the value of the underlying staked assets,” he noted. “Additionally, liquidity risks may arise if the market for deposit tokens lacks sufficient depth.”
Security concerns also exist, he added. “Security concerns in liquid staking mainly focus on the integrity of the smart contracts and the risk of bugs or exploits. It's essential to be transparent with stakers about these concerns. Ensuring the smart contracts are thoroughly audited and continuously monitored is crucial for mitigating these risks.”
Repetny noted that “Marinade v2 addresses these concerns by creating an automated delegation strategy to eliminate smart contract risks, ensuring unparalleled security and peace of mind for stakers.”
Staking on Ethereum vs. Solana
The rising stature of PoS as the preferred consensus mechanism was evidenced by the September 2022 transition of Ethereum (ETH), the second-ranked crypto by market cap, from proof-of-work (PoW) to PoS.
“Proof of stake consensus mechanism powers most of today's blockchain networks,” Repetny said. “Staking allows participants to secure the network and earn staking rewards in return.”
But with staking not included as part of the original design of the Ethereum network, there are notable differences between staking on Ethereum and staking on networks like Solana, which was PoS from its inception.
“Staking on Solana is fundamentally different from staking on Ethereum,” Repetny said. “On Ethereum, 32 ETH is necessary for native staking on a personal node. Solana, like Cosmos, introduces the concept of delegation, which allows the separation of validators and delegators. You can delegate as little as 1 SOL to any of 1,500 Solana validators to participate in securing the network and earning staking rewards.”
Despite the lower cost of entry, Solana still has a long way to go to catch up to Ethereum in terms of liquid staking, he noted.
“Solana has $61 billion in staked capital, exceeding Ethereum's, but it falls behind in liquid staking,” he said. “While 65% of Ethereum's staked ETH is in liquid form, only 6.5% of Solana's staked SOL is in liquid staking tokens (LSTs). This suggests a substantial difference in the value propositions of the liquid staking solutions on both chains.”
He said that projects like Marinade v2 are looking to change this and build on Solana’s strengths by providing unique features, “such as Protected Staking Rewards (PSR) and a Stake Auction Marketplace (SAM), that make the staking experience more seamless, secure, and efficient.”
He also said that Marinade v2 “ensures continuous staking yields and incorporates a strong protection system, ultimately providing stakers and institutions with enhanced financial freedom and security.”
Is liquid staking just rehypothecation?
When asked if liquid staking is just a rehashing of rehypothecation – as some analysts have suggested – which has caused problems for traditional finance, Repenty suggested the argument was more nuanced, saying “The concept of liquid staking has an underlying staked asset position matching the issued liquid token.”
“As it allows people to participate in DeFi, a few choose risky tactics, including leverage, which can result in a series of liquidations,” he said. “While not completely off, calling liquid staking a rehypothecation 2.0, sounds like an overstatement.”
Attracting institutional investors
Moving on from the basics of liquid staking, Repenty was asked how the digital asset industry can increase decentralized trust and security to help attract more institutional investment in the space.
“I believe we progress on decentralization by maintaining open, transparent metrics on the network's performance and providing tooling for users to participate in securing the network,” he said. “At Marinade, we run the Network page and an Automated delegation strategy that delegates to 100+ best-performing validators in one click.”
He added that improving decentralized trust and security will be crucial if the growing Real-World Asset (RWA) tokenization trend is to succeed in the long term.
“Decentralized trust and security are crucial for the RWA movement, ensuring that tokenized real-world assets are managed transparently and securely,” he said. “Utilizing blockchain's immutable and transparent nature, investors can be confident that their fractional ownership in RWAs is safeguarded, encouraging greater participation and trust in these new financial instruments.”
He also sees decentralization of the financial system as key to promoting financial freedom.
“Decentralization and financial freedom are interconnected, giving individuals greater control over their financial assets and opportunities,” Repenty said. “Staking and the tokenization of real-world assets show how decentralized finance can broaden investment access and foster a more inclusive financial system.”
“As blockchain technology progresses, ongoing education and awareness are crucial for grasping the opportunities and risks,” he concluded. “Participating in community-driven projects and keeping up with regulatory changes will enable investors to make more informed decisions and take advantage of the expanding DeFi and staking ecosystem.”
